In this infographic, the Expensivity team explores the core basics of NFTs, and we attempt to explain the concept in a way that beginners can understand. For a more in-depth look at the functional details of NFTs make sure to check out our exclusive feature article on How Non-Fungible Tokens Work.
In the first half of 2021, non-fungible tokens (NFTs) garnered $2.5 billion in sales — up from $13.7 million a year earlier
The Basics Of NFTs
- NFTs are selling for millions of dollars
Pablo Rodriguez-Fraile @pablorfraile purchased “crossroads” for $66,666 on Oct 31, 2020- Beeple:
- $6.6 million for the 10 second video clip
- $69 million FOR “EVERYDAYS: The First 5000 Days” the first purely digital work of art ever offered by a major auction house (Christie’s)
- Jack Dorsey:
- sold his digitally autographed first tweet for $3 million
- Grimes: $6 million made from “WarNymph” a series of 10 pieces
- 3LAU: $11 million in album sales and digital goods in one weekend
- Beeple:
- What Are NFTs?
- Cryptocurrency: Digital currency tokens
- Non-fungible tokens: Represent an asset other than money
- How Do NFTs Work?
- Digital keys secure NFTs using the same technology as cryptocurrencies
- Public key: serves as the ownership assignment
- Private key: authorizes change in ownership
- Blockchain maintains an “tamper proof” ledger of transactions
- While digital collectibles can be copied exactly, blockchain provides secure and effective proof of ownership
- Any digital file can become an NFT
- Games: Players earn, buy, or create new NFT game elements — Axie Infinity, Gods Unchained, CryptoKitties
- Sports: Through the NBA’s Top Shot, fans can buy, sell, and trade licensed video “moments”
- Fashion: In 2019, Nike patented tech that would give the owner of an NFT design the right to have it manufactured in the real world
- Music: NFTs can take the place of ticket sales or be used to sell albums, or unreleased songs
- Charity: NFT for Good offers marketplaces designed to sell digital art to humanitarian causes
- Digital keys secure NFTs using the same technology as cryptocurrencies
[Call Out: The most common use of NFTs is for buying and selling digital art]
Monetizing Digital Art
- Until blockchain, digital artists struggled to
- Prove they were the original creator of a work
- Monetize artworks that are easily copied
- Prevent unauthorized use of their work
- The Benefits Of NFTs
- When an artist creates an NFT, they can
- Enable features that will pay them a percentage of all future sales
- Sell art that would otherwise be difficult to find a market for
- Prove they are the original creator and authenticate the digital file
- For collectors, ownership of the NFT conveys some extra rights
- Anyone can download a digital file, but only the owner can sell it
- NFTs collectors can set the image as their profile pic or post it online
- Most buy NFTs as an investment, hoping the value will increase over time
- When an artist creates an NFT, they can
- Trading Cards Or Fine Art?
- In 2021, CryptoPunk #7523 sold for $11.8 million
- In 2014, Monet’s Water Lilies sold for $15 million
- What’s the difference?
- In 2021, CryptoPunk #7523 sold for $11.8 million
[Call Out: Digital artworks are never one-of-a-kind]
- The owner of the Monet gained a unique physical object
- Fine art can be copied but copies are never perfect
- Copies of fine art have less value than the original
- But, digital art is easily copied — and those copies are a perfect match
- Anyone can download CryptoPunk images
- The creator could create and sell additional copies as NFTs
- What Is Digital Scarcity?
- Digital files can generate unlimited perfect copies — scarcity means other limitations are placed on a digital collectible
- Partial Availability: A partial form is publicly available to share and copy, but the full version is inaccessible except for authorized parties (owners)
- Digital Marking: The file is marked in a way that shows ownership, maybe a hidden mark
- Algorithmic Immutability: The record of ownership is generated by an untamperable algorithm (blockchain)
- One or a combination of these factors help ensure a collectible remains limited-edition or one-of-a-kind
- Ultimately the value of an NFT depends on the creator to maintain the scarcity of their digital work and not sell additional copies
- Digital files can generate unlimited perfect copies — scarcity means other limitations are placed on a digital collectible
[Call Out: “One hard drive crashing could lead to permanent loss of the assets” — Check My NFT]
The Danger Of NFTs
- Crypto Theft & Loss
- Chainalysis estimates that 20% of all Bitcoin is locked by people who have forget their private key — That’s equal to $140 billion
- Losing access can be as simple as forgetting your password
- Once you’ve lost your private key, it’s unlikely you’ll get ever get it back
- In 2021, hackers stole $600 million in crypto through PolyNetwork — the largest single event crypto theft ever
- Accessing cryptocurrencies and NFTs requires a private key
- Private keys can be hacked if used or stored on a networked device
- The Problem Of Link Rot
- NFTs include very little data by themselves
- Functions like a deed to prove ownership
- Includes artist’s name and title of the work
- The collectible is usually linked with a URL
- What happens if the URL goes bad?
- Maintaining the URL depends on the web host
- If the host goes out of business the file is lost
- The creator could redirect the URL at anytime
- Many NFTs rely on InterPlanetary File System (IPFS) to distribute files across multiple hosts
- Protects against a single host going under
- NFT owners can choose to pay for continued hosting
- But no single party is responsible for maintaining the file
- NFTs include very little data by themselves
- NFT Scams Are Growing
- EVERYDAYS: The First 5000 Days by artist, Beeple was purchased for $69 Million by crypto-investor MetaKovan (Vignesh Sundaresan) & by the artist Beeple
(Michael Joseph Winkelmann)
- Both had an interest in driving up the price of NFTs
- Artist Derek Laufman discovered someone had create a verified profile in his name to sell his art as NFTs
- The impostor account was shut down, but only after purchases had been made
- If you’re considering an NFT purchase, watch out for likely scams
- Doppelganger stores and crypto wallets
- Counterfeit collectibles and digital art
- Free giveaways & NFT airdrops
NFTs are legitimate, but buyer beware
Sources:
https://www.aljazeera.com/economy/2021/7/5/off-the-chain-nft-market-surges-to-2-5b-so-far-in-2021
https://www.theverge.com/22310188/nft-explainer-what-is-blockchain-crypto-art-faq
https://www.securitymagazine.com/articles/94627-19b-in-crypto-currency-stolen-by-hackers-last-year
https://www.theverge.com/2021/3/1/22308075/grimes-nft-6-million-sales-nifty-gateway-warnymph
https://adamfard.com/blog/nfts-21-examples
https://coinmarketcap.com/alexandria/article/top-nft-games
https://www.theverge.com/2021/1/12/22227535/nyt-bitcoin-millions-forgot-passwords-digital-wallet
https://www.theverge.com/2021/3/25/22349242/nft-metadata-explained-art-crypto-urls-links-ipfs
https://www.bankinfosecurity.com/blogs/non-fungible-tokens-course-theyre-attracting-scammers-p-3011